In the Markets

U.S. stocks drop as investors react to disappointing economic data and found little comfort in the Federal Reserve's decision to keep its easy-money policies in place. Paul Vigna reports on The News Hub. Photo: Associated Press.

The Standard & Poor's 500-stock index shed 14.87 points, or 0.9%, to 1582.70, with all 10 sectors lower, after gaining 15 points over Monday and Tuesday. The Nasdaq Composite Index kept some of its two-day 49-point rally, though, falling 29.66 points, or 0.9%, to 3299.13.

Heaviest hit were small-company stocks, which are seen by investors as most sensitive to trends in the U.S. economy. The Russell 2000 Index, which tracks smaller stocks, saw steep declines, shedding 23.23 points, or 2.4%, to 924.22.

"As people have watched this market move higher, they [were] waiting to see when it was going to sell off," said Jonathan Corpina, senior managing partner with brokerage firm Meridian Equity Partners Inc.

The Fed, as expected, kept monetary policy largely unchanged. But when it came to the bond purchases the Fed has been employing to help boost the economy, officials signaled more flexibility with their strategy than in the past. The Fed said it could either increase or decrease bond purchases, depending on the job market and inflation. At previous meetings, Fed officials had talked only about winding down the bond-buying program.

That shift was a negative for stocks because it signaled greater concern about the health of the economy, said John Lynch, regional chief investment officer with Wells Fargo Private Bank, which oversees $170 billion in client assets.

"If they're willing to [stimulate] more, the economy isn't able to do it on its own," Mr. Lynch said.

Among the data causing investor worries, Automatic Data ProcessingADP-0.45% and Moody'sMCO-0.99% Analytics reported that 119,000 private-sector jobs were created in April, well below the 155,000 expected. Investors often view the ADP release as foreshadowing the monthly government jobs report, which is due out Friday.

Wednesday's data are "confirming the economy is sluggish at best," said Quincy Krosby, market strategist at Prudential Financial,PRU-1.46% which manages roughly $1 trillion in assets.

Also out Wednesday was data showing the manufacturing sector remained barely in expansion territory, and March construction spending declined 1.7% from February. Economists had expected a 0.7% increase.

Merck ranked among the biggest decliners in the Dow industrials, losing $1.31, or 2.8%, to $45.69 after the drug maker's first-quarter revenue fell short of forecasts, as patent expirations weighed on pharmaceutical sales.

Demand rose for the benchmark 10-year U.S. Treasury bond, sending yields down to 1.638%. Gold futures eased 1.8% to settle at $1,446.30 a troy ounce. The dollar slipped against the euro and the yen.

Most European markets were closed for the May Day holiday. London markets rose, with the FTSE 100 tacking on 0.3% in response to news that U.K. manufacturing activity improved more than expected in April.

Most Asian markets were also closed for the Labor Day holiday, including those in mainland China, Hong Kong, India and South Korea. Japan's Nikkei Stock Average slipped 0.4%, after China's official manufacturing PMI for April fell to 50.6 from March's 50.9. Analysts expected an unchanged reading. Australia's S&P ASX 200 lost 0.5%.

FacebookFB-1.26% fell 34 cents, or 1.2%, to 27.43 ahead of its first-quarter results due out after Wednesday's close.

AppleAAPL-0.87% slipped 3.49, or 0.8%, to 439.29. On Tuesday, the stock rallied 2.9% to a one-month high after the company launched a $17 billion bond offering.

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